by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I do a lot of work on capital budgeting. I teach several classes that focus on it, and of course it plays a major role in several of the training courses that we conduct for various organizations.
I stress that organizations should use a lot of different techniques for capital budgeting including real option analysis, Monte Carlo Simulation, and decision analysis whenever possible. Successful capital budgeting often is the determining point between whether a company is thriving or dying five years down the road.
The capital budgeting task is filled with risk and uncertainty. Given that, it is rare that the risk department is a fully integrated team into the capital budgeting process. There are a variety of reasons for this; the silofication of treasury and finance functions, ignorance of capital budgeting techniques by risk managers, ignorance of risk management by the capital budgeting team, as well as a host of others.
I believe that if there is one area that risk managers could make a positive and significance difference it is early in the capital budgeting process. Sad that this rarely happens.
